How the US could block the Comcast/Time Warner Cable merger

Comcast's $45.2 billion acquisition of Time Warner Cable (TWC) is expected to be thoroughly scrutinized by the Department of Justice (DOJ) and Federal Communications Commission (FCC), and it could be blocked if the agencies decide the merger would significantly reduce competition and harm consumers.

Even if Comcast wins approval, the merger might require consumer protection provisions that would make it harder for Comcast to wield its increased size in ways that make the TV and Internet markets less competitive. Comcast said it expects regulatory review to take nine to 12 months. For now, let's take a look at what authority the DOJ and FCC might use to block or alter the proposed acquisition.

Telecom expert Harold Feld, senior VP of consumer advocacy group Public Knowledge, explained that the DOJ and FCC each have authority here, but the processes they use are quite different.

Further Reading

"DOJ does this under antitrust," Feld told Ars. "They have to sue in federal court to block the transaction, and they have the burden of proof under a traditional antitrust analysis. They would have to show that there is a substantial likelihood that the transaction would reduce competition in some relevant market." The DOJ would have to prove its case by a preponderance of evidence.

The FCC's authority stems from the fact that Time Warner Cable would have to transfer Cable Television Relay Service licenses and telephone service licenses to Comcast.

"The FCC is somewhat different because the FCC actually is the adjudicator," Feld said. "The FCC as a commission must determine whether the transfer of the licenses serves the public interest. The burden is on the applicants to show there are sufficient public interest benefits to offset any potential harms to the public interest."

FCC has options

The FCC could approve the acquisition outright or approve it with conditions. If Comcast agrees to the conditions, it's smooth sailing. If the FCC wants to challenge, it wouldn't immediately reject the merger. The FCC would declare "that there are issues of material fact, questions we can't answer from the current state of the record on whether this serves public interest," Feld said. The FCC would refer the questions to an administrative law judge (ALJ), who would hold a full evidentiary hearing complete with cross-examination of witnesses.

"If the FCC refers to an ALJ, that is generally considered to be the kiss of death for a merger because it takes several years to get through that process," Feld said. The ALJ hearing itself could take several months, and even after it's done the merger would go back to the FCC for review. The decision could be appealed regardless of who wins, potentially making the whole process too lengthy for Comcast to bother with.

The FCC went the ALJ route in 2002 for the proposed Dish/DirecTV merger and in 2011 with AT&T/T-Mobile. Both acquisitions were doomed.

Now that we've talked about the process, on what grounds could US authorities prevent Comcast from buying Time Warner Cable? The first and perhaps most important question is how to define the market or markets that would be affected by the transaction.

Comcast has placed its focus on the multichannel video programming distribution (MVPD) market, saying that the acquisition of TWC would bring Comcast from 22 million to 30 million subscribers, or less than 30 percent of the nationwide total. Comcast offered to divest itself of three million subscribers in a bid to get under 30 percent and perhaps appease regulators.

Additionally, Comcast has pointed out that it does not compete against Time Warner Cable in any individual cities or towns. That fact is illustrative of how little competition exists in the cable market, as the vendors have effectively divided up territories to the point where individual consumers have few choices. To Comcast's antitrust lawyers, it's a positive—the merger won't reduce the number of cable choices customers have.

Comcast influence over numerous markets

Comcast's market definition isn't the only one that will be proposed, though. Consumer advocacy group Free Press claimed that the merger would give Comcast control over "more than half of the US triple-play market for video, voice, and Internet service," and thus "unprecedented market power over consumers and an unprecedented ability to exert its influence over any channels or businesses that want to reach Comcast's customers."

Further Reading

Even at less than 30 percent of residential households, Comcast would have improved negotiating power in a variety of markets, which it could conceivably use to harm competitors and its own customers. Comcast would also have more room to grow as owner of TWC. CableTV.com, which tracks availability of cable services, reported that Comcast's combined footprint with Time Warner Cable would be 214 million Americans, or about two-thirds of the US population, up from 129 million for Comcast today. Not all of those people subscribe to Comcast, especially in areas that have more than one cable company or another competitor like Verizon FiOS, but the number shows how big Comcast's potential reach is.

Comcast's increased size would make it easier to demand payments in the peering market from Internet bandwidth providers like Cogent or Level 3, instead of continuing to exchange traffic for free as has been the tradition. Comcast could also use greater negotiating power to get higher payments from other phone providers for the ability to complete calls to Comcast customers.

Comcast's digital voice technology isn't regulated as extensively as the traditional phone service offered by the likes of AT&T. Thus, Comcast could say, "hey Sprint would you like to be able to complete your calls to people who live in homes that have Comcast digital voice? You will need to pay more than you already pay," Feld said. Rural telephone providers could also see their rates go up "because Comcast controls all the major cities and they're unregulated," Feld said.

Comcast's buy of Time Warner would also strengthen its purchasing power for TV programming.

"Right now, Comcast pays a third or half as much for programming as any upstart infrastructure provider," said Susan Crawford, a law professor, former tech policy advisor to President Obama, and author of Captive Audience: The Telecom Industry & Monopoly Power in the New Gilded Age. "This is the source of Comcast's secret strength because 91 percent of Americans who subscribe to high-speed Internet access also subscribe to pay-TV, so any prospective infrastructure competitor has to enter two markets at once: the market for programming, where the costs per subscriber will be sky-high compared to Comcast's, and the market for building physical infrastructure. Because the merger makes Comcast that much bigger, this gulf will widen, making competition even more unlikely than it was when Comcast was operating on its own."

Comcast's advantage in buying programming is particularly problematic for sports networks, because pay-TV providers have been able to keep most major sports packages out of the hands of online video providers like Netflix. "Although Comcast claims its pay-TV programming competes with Netflix, YouTube, and Hulu, of which it's a part owner, its power to instruct programmers not to sell to those outlets will be increased as it gets bigger," Crawford told Ars.

A bigger Comcast would also have greater negotiating power with cable modem equipment makers, she said.

Comcast argued that its increased size will bring cost savings and efficiencies that can help it improve quality of service and technology offered to consumers. The Information Technology and Information Foundation, arguing in favor of approving the merger, wrote that "the economic benefits of the combined efficiencies and economies of scale will flow to consumers in the form of lower prices and/or higher quality service."

Comcast itself won't promise lower prices, though. "We're certainly not promising that customer bills are going to go down or even increase less rapidly," Comcast Executive VP David Cohen said on the day the acquisition was announced.

Giving Comcast what it wants—with conditions

For the moment, let's assume the Comcast/Time Warner merger will be approved with conditions. What would those conditions look like?

Comcast already offered to divest itself of three million subscribers and said net neutrality provisions it agreed to in its purchase of NBCUniversal in 2011 will be automatically extended to Time Warner. Those conditions, which expire in 2018, prevent Comcast from blocking or discriminating against Internet services like Netflix or YouTube.

Those provisions could be extended or made permanent, Feld said. Other possible conditions could include a requirement to offer Internet service with unlimited data, at least in Time Warner Cable territory. Data caps might be a topic of merger proceedings, because Comcast has been moving more aggressively toward "usage-based billing" than its competitors.

Device attachment requirements that go beyond existing "CableCARD" rules that let consumers use third-party equipment with cable services could also be on the table. The FCC and DOJ could also seek limits on what Comcast can charge for phone interconnection and use the merger as an opportunity to dive deeper into the peering market.

Peering deals have generally been shrouded in secrecy. But we do know the failure of peering negotiations can harm the quality of home and business Internet service because it can lead to congestion in the links that pass traffic from one network to another.

"If we were in a competitive world, Comcast would have every incentive to make those gateways [between networks] as wide as possible so as to respond to consumer demand," Crawford said.

But the FCC hasn't publicly taken any major steps to investigate the peering market.

"The merger makes this issue front and center because our argument is you're creating a company that will have the majority of residential subscribers in the United States, and that's market power in the peering market," Feld said. "Even if the FCC ultimately decides they don't need to do anything, they are going to demand to take a look at it, and the DOJ is going to demand to take a look at it, because it's a relevant market."

Comcast has said this transaction won't negatively impact the peering market, and it pointed to the fact that it hasn't had a public peering dispute since a battle with Level 3 in 2010.

Crawford suggested that Comcast could be required to divest ownership of sports content or make it easier for consumers to buy Internet access without also buying TV programming. Requirements to allow Netflix and other competing services on cable boxes may be unlikely, but it's a possible subject for discussion. Unbundling TV channels could make sense, "but again for very popular programming, especially sports, Comcast's volume pricing deals are the real problem," she said.

Comcast could be forced to buy programming through collective rights associations, the way smaller operators do, putting Comcast on a level playing field with other companies that offer TV channels, she said.

Then again, Comcast might get its merger approved without any major restrictions. Crawford didn't offer any predictions on whether the merger will be approved or denied, but she views the regulatory process as a chance to place a spotlight on the cable market and US communications policy. "My hope is that this is finally forcing Americans to pay attention to the power of the cable monopolists and that we'll have a genuine year of engagement on US policy toward communications in general," she said.

Promoted Comments

Sure, the US could block this, but given the way that the corps totally own Washinton they won't. This merger will screw over the public, but the corps are the politician's real constituents, not the public. The days of Teddy Roosevelt style trust busting has been over for decades now.

"... net neutrality provisions it agreed to in its purchase of NBCUniversal in 2011 will be automatically extended to Time Warner. Those conditions, which expire in 2018, prevent Comcast from blocking or discriminating against Internet services like Netflix or YouTube."

Yes, actively blocking or discriminating against. That statement (and other similar ones in other articles) doesn't address the possibility of "letting non-optimized traffic patterns continue to degrade over the life of the agreement, until the service is near-unusable anyway" which is likely the cause of current Netflix speed issues.

Verizon and Comcast might say they're not actively throttling traffic, but the case can certainly be made that they're not making much attempt at allowing it to work as advertised, either.

Been said a number of times, but the ONLY way this makes sense for consumers is if:

1) Comcast sells off or spins off its content interests (including NBC and its speciality stations and Universal Studios), and any other content-generator companies that have been under their mega-umbrella in recent years. Their business should solely be providing access to the internet, access to television and access to phone service, without having any control whatever over content.

2) The FCC has to make it EASY for small, local cable companies to get into the game, and have full access the cable infrastructure, in 100% of markets. Some apologists talk about "Comcast can't force companies out of a market" but the reality is they've gamed the system so that it's cost-prohibitive for new start-ups to gain access to cable infrastructure in many places.

3) All arrangements between Verizon and Comcast to stay out of each other's broadband markets, must be ruled collusive / illegal, bringing FiOS to all markets where Comcast operates.

Then and only then would this merger be anything but a giant compost heap.

The author of that shillage couldn't even be bothered to make a half-assed argument in favor of this travesty. Whatever Comcast paid for that propaganda, they were ripped off. A Comcast marketing intern could have farted that out at lunch time.

Sure, the US could block this, but given the way that the corps totally own Washinton they won't. This merger will screw over the public, but the corps are the politician's real constituents, not the public. The days of Teddy Roosevelt style trust busting has been over for decades now.

The provision I know would never fly, but I would love to see: All cables are, after 10 years, required to be available for leasing to third parties at fair market rates.

In other words, to open up the cable system like DSL on phone lines, where competitors can come in and start their own ISPs and cable TV providers on the same lines. You know, so we could have real actual competition for a change.

Unfortunately, beyond the fact that the FCC's corporate masters would never agree to this, I think there are technical reasons why it would not fly as well--cable lines are shared too much between households.

Been said a number of times, but the ONLY way this makes sense for consumers is if:

1) Comcast sells off or spins off its content interests (including NBC and its speciality stations and Universal Studios), and any other content-generator companies that have been under their mega-umbrella in recent years. Their business should solely be providing access to the internet, access to television and access to phone service, without having any control whatever over content.

This point is so important... With as much reach as they will have, they can not have any hands in the content cookie jar...

2) The FCC has to make it EASY for small, local cable companies to get into the game, and have full access the cable infrastructure, in 100% of markets. Some apologists talk about "Comcast can't force companies out of a market" but the reality is they've gamed the system so that it's cost-prohibitive for new start-ups to gain access to cable infrastructure in many places.

If Comcast were forced to let other providers use its infrastructure at fair prices (like BT Britain), then the deal might actually be good for consumers. Unfortunately, there is no way in hell they would agree to it because it would increase competition. It would mean giving up their monopoly/duopoly status in so many places.

Unfortunately I can't say that I'm surprised it turned out this way. To most people computers and technology are pure magic. They don't understand peering agreements, they don't really know there's a night and day difference between DSL and cable/fiber services (and that the two are not even close to being considered competition), and most of them don't stream Netflix or Youtube enough (or at all) to notice quality and buffering problems. Or if they do, again, it's magic to them. Buffering issues could be caused by a sun spot, someone slaying a jabberwock with a vorpal blade, computer virus, etc.

I'm sincerely hoping our technical literacy gets to the point that people understand what a big deal it is that there's usually only one broadband provider you can buy service from, and how severely a company in that situation can abuse their power. I'm still kind of shocked that we realized what bad news it would be to allow utilities to operate unregulated, but somehow the identical (nay, perhaps even more pure because of the cost of moving bits) natural monopoly of ISPs and infrastructure has slipped under the radar.

The notion that a merger like this can have a significant chance of being approved boggles my mind. How in any way can this be good for consumers in a market that is already an oligarchy?

One of the core argument in support of the merger, that since Comcast and Time-Warner don't compete in any of the same markets, is completely ludicrous. Comcast physically can't compete in those markets because it doesn't have any infrastructure there.

Also, can someone please explain the quip found on:[link]http://www.twcmedia.com/TWC/PB/CustomerCoveragePage.aspx[/link]

"No one covers America like Time Warner Cable. As of November 2010, 41% of TV households across the country are Time Warner Cable subscribers."

As much as I'd love to see the FCC stand up to this, the fact they already let a content delivery service purchase a content producer shows they have zero interest in protecting the American consumer.

It should be even more blatantly obvious with yesterday's news that Time Warner is apparently backing away from adding Netflix to its DVRs thanks to Comcast. Of course, money always talks louder than the interest of the customer, even when all the evidence shows this could be nothing but damaging to an already-messed-up marketplace. The best-case scenario for this merger is that everything stays just as shitty as it already is.

Yea, this is a downvote. OK, here is the skinny, they don't have to compete directly against each other at this moment to harm the consumer. Much like AT&T and Clear Channel they just need to get big enough in the future to do harm. Swallowing up a large company to become an even larger company provides leverage in current markets due to a wider base to spread losses and risk. They squash one market at a time and once smaller competition has been driven out, well, it is expensive to maintain ancient hardware and those bits aren't going to push themselves out of those pipe thingies!

Fewer companies always always ALWAYS equals less competition. Just because they don't compete now does not preclude their competing in the future.

The answer to all of this is not to beseech Washington to save us from corporate autocracy, but publicly owned and operated last mile infrastructure. Keep it local where we have some hope of influencing the politics directly and democratically.

Been said a number of times, but the ONLY way this makes sense for consumers is if:

1) Comcast sells off or spins off its content interests (including NBC and its speciality stations and Universal Studios), and any other content-generator companies that have been under their mega-umbrella in recent years. Their business should solely be providing access to the internet, access to television and access to phone service, without having any control whatever over content.

2) The FCC has to make it EASY for small, local cable companies to get into the game, and have full access the cable infrastructure, in 100% of markets. Some apologists talk about "Comcast can't force companies out of a market" but the reality is they've gamed the system so that it's cost-prohibitive for new start-ups to gain access to cable infrastructure in many places.

3) All arrangements between Verizon and Comcast to stay out of each other's broadband markets, must be ruled collusive / illegal, bringing FiOS to all markets where Comcast operates.

Then and only then would this merger be anything but a giant compost heap.

I disagree. Much like the AT&T/T-Mobile and Sprint/T-Mobile mergers this merger will never be anything but a gian compost heap overflowing with political goodness and f(l)avor.

Nothing good will come from such a merger, the customers lose. With that being said, the powers that be will not stop it, the corporations run America now. No such thing as Capitalism or the like, just Corporatism.

They also said that the FCC is an independent agency. Unfortunately, they left it up to the reader's imagination to infer what that means. I wish they had just come out and said it: BECAUSE the FCC is an independent agency, Obama CANNOT simply direct them to implement net neutrality (or any other executive order).

A monopolistic player merging with another monopolistic player is still a monopolistic player.

I sincerely hope this merger isn't allowed to actually take place. Consumer choices for broadband are usually pretty slim in most areas, and it certainly doesn't encourage competition that benefits the customer when one big fish swallows another.

When this deal was announced, my initial reaction was that there was no way that the DOJ would allow this to happen. But as this article points out:"They would have to show that there is a substantial likelihood that the transaction would reduce competition in some relevant market." Due to the monopolistic nature of cable TV, I'm not sure that they do compete in any areas (and if they do, it can't be many). Still hoping it gets blocked some how. I'm somewhat satifisfied with my TWC service and hated Comcast where I lived before.

The FCC should force Comcast to sell access to their infrastructure to third-party companies so that they can compete in tv/internet/phone (while paying comcast reasonable rates). Kinda how everyone is allowed to use phones lines to provide service... just extend that to the cable network.

When this deal was announced, my initial reaction was that there was no way that the DOJ would allow this to happen. But as this article points out:"They would have to show that there is a substantial likelihood that the transaction would reduce competition in some relevant market."

There has been some discussion that content creators could show the post-merger Comcast could exercise monopsony power in the market for purchasing TV content. But think about that: if Comcast were big enough to exert leverage over the likes of CBS to extract lower carriage fees, how exactly would that be a bad thing for consumers / viewers?

1) Force all physical cable plants to be declared a common carrier.2) Split all content aggregators (like Comcast, TWC, and the others) and content providers (like Comcast/NBC Universal) to divest themselves of all last-mile networks. These cannot be wholly own subsidiaries, but must be totally separate entities.

What this does is threefold: First, it ensures that some content providers cannot lock out or degrade other content providers on their networks (ie, Comcast not allowing Netflix or slowing them to the point of SD quality only). Second, it opens up competition between cable companies by allowing all comers to offer service over the physical cable plant (via IP streaming, like TWC and Comcast do now via their iPad apps). Third, it allows the cable plant operators to compete on service and price for their core competency - bandwidth.

Now, the cable companies will fight this tooth and nail. They're addicted to the large revenue stream that a captive consumer base brings. And this directly affects this in a big negative way, and forces them to start competing on quality, service, and price - something they are not equipped to do.

Comcast spent $18.8 million on lobbying in 2013. They were the seventh biggest lobbyist in Washington, spending more than the likes of GE, AT&T, or Boeing. TWC spent $3.6 million. Together, Comcast and TWC would have been the fourth biggest lobbyist in Washington, behind only the U.S. Chamber of Commerce, the National Association of Realtors, and Blue Cross Blue Shield. The power they would have to dictate law (and fight further restrictions on lobbying) would only increase with time.

Comcast spent $18.8 million on lobbying in 2013. They were the seventh biggest lobbyist in Washington, spending more than the likes of GE, AT&T, or Boeing. TWC spent $3.6 million. Together, Comcast and TWC would have been the fourth biggest lobbyist in Washington, behind only the U.S. Chamber of Commerce, the National Association of Realtors, and Blue Cross Blue Shield. The power they would have to dictate law (and fight further restrictions on lobbying) would only increase with time.